AUD/USD Declines on Wednesday, as RBA Decision & US Data Don’t Favor Aussie

The Australian dollar is losing ground versus the US dollar on Wednesday, October 6, slashing gains from earlier in October. The pair formed a double top pattern on the hourly chart, a strong indication of uptrend reversal, which happened earlier on Wednesday.

AUD/USD faced strong resistance at 0.7300, after which it broke below the double top’s neckline at 0.7256 and bottomed out at a daily low at 0.7226 – the lowest since the first day of the month.

As you can see on the chart, the price action found support at 0.7232 as the Relative Strength Index (RSI) broke below the oversold line.

The daily chart shows that the bullish attempt at the start of October couldn’t challenge the general downtrend that started in March at over 0.8000, when the pair hit the highest since February 2018. The price keeps moving below the resistance line of the general bearish trend.

Fundamentals Moving AUD/USD

The pair has been quite volatile this week amid several key economic updates and events. Here are the main fundamentals that have been impacting AUD/USD so far this week:

Reserve Bank of Australia Leaves Rate Unchanged (***)

On Monday, the Reserve Bank of Australia (RBA) kept the interest rate at a record low of 0.1%, which persisted since the start of the pandemic. The decision was in line with expectations, although critics say that historically low rates are artificially boosting the property market, potentially creating a bubble.

RBA Governor Philip Lowe admitted in his statement that property prices were increasing but argued that inflation was not yet high enough to call for an increase in interest rates. He stated:

“Housing prices are continuing to rise, although turnover in some markets has declined following the virus outbreak. Housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors.”

The RBA maintained its decision to continue buying $4 billion of government securities per week until at least mid-February 2022.

The central bank sticks to its accommodative monetary policy in an effort to support the economy during the COVID-19 pandemic, as the number of new cases keeps updating the record high.

As a rule, lower interest rates put pressure on the national currency, as the money markets become less attractive compared to stocks, commodities, and other assets. In fact, the reason why the central bank cuts the rate is to encourage consumption and investment, thus supporting economic growth. However, the RBA’s decision had been already priced in and hasn’t affected the AUD that much.

The Aussie has been under pressure because of the lockdowns imposed in several regions to curb the spread of COVID, but the government expects that the high vaccination rates would enable an early reopening. Lowe added:

“As vaccination rates increase further and restrictions are eased, the economy is expected to bounce back. The Bank’s business liaison and data on job vacancies suggest that many firms are seeking to hire workers ahead of the expected reopening in October and November.”

Despite the slowdown in GDP in the September-October period due to the lockdowns, the RBA hopes for a quick rebound.

In our central scenario, the economy will be growing again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year,” Lowe said.

US Services PMI Beat Forecasts (**)

On Tuesday, the US dollar was driven by the upbeat report on the services sector. The Institute for Supply Management (ISM) said that its services purchasing managers index (PMI) came in at 61.9 in September, up from 61.7 in August. Economists expected a decline to 60.

Seventeen services industries, including retail trade, public administration, and finance and insurance saw acceleration. Only agriculture, fishing, hunting, and forestry reported a decline in activity.

Consumer spending is shifting from goods to high-contact activities, such as travel, as the US economy normalizes following the massive COVID vaccination program.

Still, the US services sector has been struggling with a shortage of inputs and increasing prices due to the pandemic. There are also shortages of raw materials and labor, which is true about other sectors as well.

ADP Report Suggests Improving Job Market (**)

On Wednesday, the ADP National Employment Report showed that the US economy added more jobs than expected, although the ADP data often fails to accurately predict the trends of the much-awaited Nonfarm Payrolls report, which is scheduled for this Friday.

According to ADP data, US private payrolls increased by 568,000 jobs in September, up from 340,000 jobs in August, which was revised downward from the initial reading at 374,000. Economists anticipated an increase of only 428,000.

While the ADP report is definitely encouraging US dollar bulls, it’s not reliable. Daniel Silver, an economist at JPMorgan, told Reuters:

We continue to believe that the ADP employment report is not a reliable predictor of the related employment data released by the BLS. In the first print of the July figures, the ADP data showed an increase in private employment of 330,000 while the BLS data showed a surge of 703,000.”

The next swing move will be decided by the Nonfarm Payrolls report. We recently reported that economists anticipate an increase of 500,000 jobs.

Inflation Worries Drive USD (***)

So far, all fundamentals seem to favor the American currency, which had a great performance in September. On Wednesday, the US dollar has been driven by inflation worries following a persistent surge in energy prices, which prompt investors to consider safe havens and exit positions on riskier assets.

Crude oil jumped to the highest level in seven years, as WTI futures almost hit $80 per barrel.  

Rising inflationary pressures could force the Federal Reserve to raise interest rates earlier than expected, which is a bullish signal for the national currency.

The Fed previously said that it might start reducing its monthly bond-buying program as early as next month and then it might start increasing the interest rate as the economy recovers.

Meanwhile, another good news for the greenback came from Republicans, as Senate Republican Leader Mitch McConnell said on Wednesday that there was “plenty of time” to pass a debt ceiling increase through the budget reconciliation process, as he suggested that his party would support a fast procedure.

Our colleagues have plenty of time to get it done before the earliest projected deadline. There would be the potential for time agreements to wrap it up well before any danger,” he said.

It means that the US may avoid the first default in history, which could result in a major crisis. You can read more about the debt ceiling issue in our recent post.

What’s Next for AUD/USD?

While there is a confluence of fundamentals pointing to stronger USD, you should be ready for an increase in volatility, especially when the Nonfarm Payrolls report is released. If the job market data beats expectations, AUD/USD may decline to test a strong support level at 0.7200. Otherwise, the price action may head towards 0.7300 again, which is a strong resistance confirmed by the double top pattern.

On larger timeframes, if the pair cannot break above the 50 MA soon, it may either move horizontally in choppy moves or decline to 0.7000 by the end of the month, which is the lowest since November last year.

Make sure to follow the updates before making any trading decision!



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